ANTITRUST IMMUNITY FOR AIRLINE ALLIANCES MAKES PASSENGERS WORSE
OFF
Antitrust immunity for the big three international airline alliances may reduce
competition and therefore make passengers worse off. That is the central finding of
research by Volodymyr Bilotkach and Kai Hueschelrath, presented at the Royal
Economic Society’s 2011 annual conference.
Antitrust immunity is intended to allow the three global airline alliances – Skyteam, Star
Alliance and oneworld – to coordinate their joint operations more effectively, such as
exchange flights between airlines. The study shows, however, that by refusing to
cooperate with airlines that are not part of the alliance, customers may lose out.
Looking at data from the transatlantic market, the authors find that when an airline
partnership is granted antitrust immunity, airlines outside this partnership end up
reducing the number of flights to the airports where these airlines have most of their
fleet – sometimes by up to 8%. This traffic is replaced by airlines within the partnership,
thus reducing competition.
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This study suggests that antitrust immunity, so generously given to the international
airline alliances, may decrease competition on markets, which were previously
considered by the regulators not susceptible to potential for reduced market welfare.
Antitrust immunity refers to the right to jointly set prices and schedules, granted to the
international airline alliances. It has been believed that antitrust immunity can bring
about lower prices and higher economic welfare, as it allows the partner airlines to
remove double marginalisation when pricing itineraries that involve change of carrier en
route (so-called ‘interline itineraries’), and better coordinate other aspects of joint
operations.
Regulators also believed that the only markets where cooperation between the carriers
can decrease competition were routes between the partner airlines’ hubs. For example,
the British Airways/American Airlines partnership encountered serious problems getting
their request for antitrust immunity approved for fear that such would decrease
competition on London-New York and London-Chicago routes.
This study shows that antitrust immunity can decrease competition on all the markets
originating at the partner airlines’ hub airports. In the context of the transatlantic airline
market, the findings mean that competition on all the routes originating at London, Paris,
Frankfurt, Amsterdam and a number of other gateways can decrease, now that carriers
within all three global airline alliances – Skyteam (Air France, KLM and Korean
Airways), Star Alliance (Air Canada, Lufthansa and United Airlines) and oneworld
(American Airlines, British Airways and Qantas) – enjoy antitrust immunity.
At the time of granting of the antitrust immunity, regulators believed that only a limited
set of markets (such as London-Chicago, Paris-Atlanta, Frankfurt-Chicago or
Amsterdam-Detroit) could be subject to reduced competition.
The mechanism that creates this effect is market foreclosure. In the context of airline
partnerships, market foreclosure refers to the partner airlines keeping all the interline
passenger traffic within the alliance, and refusing to accept the passengers from
outside the partnership.
The researchers demonstrate that antitrust immunity creates strong incentives for the
carriers to engage in such a practice. Such a concern has also been raised by
American Airlines: the carrier claimed that it found it very difficult to feed its passengers
to Air France’s route from Paris Charles de Gaulle after Skyteam was granted antitrust
immunity.
Analysing the data from the transatlantic market over an extended time period, the
researchers discover that when an airline partnership is granted antitrust immunity,
airlines outside this partnership end up reducing their traffic to the partner airlines’ hub
airports by 2.5-8.5%.
The results also suggest that traffic lost by the carrier outside the partnership with
antitrust immunity is replaced by the hub operator with antitrust immunity. We thus end
up with a more asymmetric market structure (airlines within alliances become more
dominant), which may reduce competition.
Furthermore, partner airlines obtain a more dominant position on one-stop routes (such
as London-Chicago-Tucson) originating at their hubs. But the researchers note that
lack of suitable data prevented a thorough analysis of competitive effects of market
foreclosure in international airline markets.
In the end, the study uncovers a previously unidentified aspect of airline alliances.
Understanding all the effects of global airline partnerships is becoming an increasingly
important issue, as the three global alliances maintain their worldwide dominance.
ENDS
‘Airline Alliances, Antitrust Immunity and Market Foreclosure’ by Volodymyr Bilotkach
and Kai Hueschelrath